Hang Seng Index revision to lift China profile

ChrisOliver

HONG KONG (MarketWatch) - Hong Kong's benchmark Hang Seng Index will adopt a new weighting methodology and expand the number of constituent shares to 38 from 33, in the biggest overhaul of the index in its 37-year history.

The changes will be implemented over a year beginning in September,

Spokesmen for compiler HIS Services Ltd said Friday they will cap individual constituent weightings at 15% using a free-float-adjusted market-capitalization-weighted formula. The change will halve the weighting of HSBC Holdings PLC, (5) currently the biggest constituent, from its current 30%.

The index compiler also said it would change rules to enable Hong Kong-listed shares of China-based companies -- so-called H shares -- to join the Hang Seng Index. All five new additions to the benchmark index are expected to be H shares, reflecting the growing presence of China companies on the Hong Kong Stock Exchange.

Last year, H shares accounted for 26.5% of the total average daily trading volume of the main board.

Recently the Hang Seng Index reflected half of total market turnover, as investors turned their attention toward major Chinese companies, particularly the big banks. The Hang Seng Index was originally intended to cover 70% of total market turnover.

H shares had been barred from the index because a proportion of their shares were not publicly traded.

In February HIS Services revised its policy to enable H shares that don't have unlisted share capital to be eligible for inclusion.

Many market watchers say China Construction Bank, (939) China's third biggest lender, will be the first addition to the Hang Seng Index.

"Its weight will be cut by half, but this may cause only short-term impact on HSBC shares' price performance, given that probably 80% of the turnover of the stock is in London and not many funds are now benchmarked on the Hang Seng Index."

According to ABN Amro estimates, using the new methodology, China Construction Bank will have an 11.1% weighting in the index, becoming the second biggest stock on the index after HSBC.

Brokers say inclusion in stock-market benchmarks can benefit share prices because large index-tracking funds would be prompted to buy the member shares.

Under the new free-float-weighted methodology, China Mobile (Hong Kong) Ltd., (941) the second-largest blue chip by market capitalization, will see its weighting lowered to 11.43% from the current 16.54%.

Wong estimates other losers include China Netcom (906) and China Unicom, (762) which will see their weightings decline 40%, or 0.69 percentage point, and 0.67 percentage point respectively. Local rail operator MTR Corp. (66), will also lose 40% in index weight.

Wong estimates the biggest winners will be selected big blue-chip stocks. He estimates the weighting of Swire Pacific (19) and Bank of East Asia (23) will see their index weights rise 140%, or 2 percentage points and 1.33 percentage points respectively.

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